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KNX > SEC Filings for KNX > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for KNIGHT TRANSPORTATION INC

Form 10-Q for KNIGHT TRANSPORTATION INC


12-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

Except for certain historical information contained herein, this report contains certain statements that may be considered "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended, and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of revenues, earnings, cash flows, capital expenditures, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed acquisition plans, new services, or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. Words such as "believe," "may," "could," "will," "expects," "hopes," "estimates," "projects," "intends," "anticipates," and "likely," and variations of these words, or similar expressions, terms, or phrases, are intended to identify such forward-looking statements. Forward-looking statements are inherently subject to risks, assumptions, and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Item 1A. Risk Factors," set forth in our Form 10-K for the year ended December 31, 2012, along with any supplements in Part II below.

All such forward-looking statements speak only as of the date of this Form 10-Q. You are cautioned not to place undue reliance on such forward-looking statements. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.

Introduction

Business Overview

We are a provider of a wide range of truckload services, which generally involve the movement of full trailer or container loads of freight from origin to destination for a single customer. We are headquartered in Phoenix, Arizona, and use our nationwide network of regional service centers, one of the country's largest company-owned tractor fleets, and access to the fleets of thousands of third-party equipment providers, to provide our customers significant capacity and a wide range of efficient and valuable solutions for their supply chain needs. Our services include dry van, temperature-controlled, dedicated, drayage, intermodal, freight brokerage and other logistics services. Through our multiple service offerings and transportation modes, we are able to transport, or arrange for the transportation of, general commodities for customers throughout the United States and parts of Canada and Mexico.

Our operations involve a range of investments in capital assets and expected operating margins. Our asset-based businesses generally include dry van, temperature-controlled, dedicated, and drayage services. Our non-asset-based services generally include intermodal, freight brokerage and other logistics services. However, within our asset-based services, the use of independent contractors to provide tractors lowers the capital investment in certain instances in our dry van, temperature-controlled and drayage services operations. In addition, drayage operations generally involve less expensive tractors and do not require a large investment in trailers. We evaluate the growth opportunities for each of our businesses based on customer demand and supply chain trends, availability of driving associates, expected returns on invested capital, expected net cash flows, and our company-specific capabilities.


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Our operating strategy is to gain truckload market share by leveraging our services, relationships, and service center network, and to improve asset productivity through enhanced technology and market knowledge, while maintaining an extreme focus on cost. To achieve these goals, we operate primarily in high-density, predictable freight lanes in select geographic regions, and attempt to develop and expand our customer base around each of our service centers by providing multiple truckload alternatives for our customers. This operating strategy allows us to take advantage of the large amount of truckload freight transported in regional markets. Our service centers enable us to better serve our customers and work more closely with our driving associates. We operate a modern fleet to appeal to driving associates and customers, reduce maintenance expenses and downtime, and enhance our operating efficiencies. We employ technology in a cost-effective manner to assist us in controlling operating costs and enhancing revenue. Our operating strategy for our non-asset-based activities is to match quality capacity with the shipping needs of our customers through the capacity provided by our network of third-party truckload carriers and our rail providers. Our goal is to increase our market presence, both in existing operating regions and in other areas where we believe the freight environment meets our operating strategy, while seeking to achieve industry-leading operating margins and returns on investment.

The main factors that affect our results are industry-wide economic factors, such as supply and demand, fuel prices, the number of tractors we operate, our revenue per tractor (which includes primarily our revenue per total mile and our number of miles per tractor), the freight volumes brokered to third-party equipment providers (including our rail partners), our ability to hire, develop, and retain qualified driving associates, and our ability to control costs.

We are committed to providing our customers a wide range of truckload services and continue to invest considerable resources toward developing a range of solutions for truckload customers across multiple service offerings and transportation modes. Our objective is to provide truckload services that, when combined, are industry leading for margin and growth, while providing efficient and cost effective solutions for our customers.

Outlook

We have created a service center network, a modern fleet, efficient operations, and the capability of providing a wide range of truckload services to customers in North America. We believe our operating strategies are contributing factors to our future revenue and earnings growth.

For the first nine months of 2013, the majority of our growth has occurred in our less capital-intensive non-asset based operations such as brokerage and intermodal. We expect our ongoing investment in providing a wide range of solutions for our customers will lead to additional growth opportunities in all of our businesses over time.

Although we experienced reduced truckload freight demand during the third quarter of 2013, we expect truckload freight demand to improve slightly for the remainder of 2013 based on our expectation of moderate economic growth. In addition, we expect that the U.S. Department of Transportation Federal Motor Carrier Safety Administration's Compliance Safety Accountability ("CSA") program, new industry-wide hours-of-service rules that went into effect July 1, 2013, the pending electronic logging devices mandate, and other regulations could result in a reduction in effective trucking capacity to serve increased freight demand. In addition, an expanding United States economy could create alternative employment opportunities for driving associates we wish to hire. Reduced hours of operation resulting from the new hours-of-service rules and driver shortages could negatively impact equipment utilization, even in a stronger demand environment. In such an environment, we believe carriers that are well-positioned to develop and retain driving associates, withstand supply and demand fluctuations, and provide safe, dependable, and high-quality service to customers will have opportunities to improve yield and grow market share. We believe domestic and global economic and political conditions present the most direct challenges


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to improved freight demand. These threats include the possibility that rising energy prices, an inability of the United States government to timely and adequately address fiscal issues, currency fluctuations, or other factors outside our control could reduce consumer spending or industrial investment, thus negatively affecting freight volumes. From a cost perspective, we expect recruiting and retaining sufficient numbers of high quality driving associates will continue to be increasingly costly, equipment prices will continue to rise, and higher fuel prices will not be fully offset by fuel surcharges. In the current economic and regulatory environments, it will be important to allocate equipment to compensatory shipments, use technology to generate efficiencies, and effectively manage fuel and other costs. We believe we have the service center network, the modern fleet, the comprehensive truckload services, the management team, the technology, the focus on cost control, and the capital resources to successfully overcome these challenges and capitalize on future opportunities.

We will continue to utilize the flexibility of our service center model to react and adapt to market conditions. We will attempt to optimize our model and refine our execution in reaction to, or in anticipation of, truckload market dynamics. We will continue to evaluate acquisitions and other opportunities that we anticipate will create value for our shareholders and further advance our long-term strategy.

Revenue and Expenses

We primarily generate revenue by transporting freight or arranging the transportation of freight for our customers. Generally, we are paid a predetermined rate per mile or per load for our services. We enhance our revenue by charging for tractor and trailer detention, loading and unloading activities, and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. The main factors that affect our revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, the number of miles we generate with our equipment, and the freight volumes we successfully ship through our third-party equipment providers. These factors relate, among other things, to the general level of economic activity in the United States, inventory levels, specific customer demand, the level of capacity in the trucking industry, and driver availability.

The most significant expenses in our business are primarily variable and include fuel, driver-related expenses (such as wages, benefits, training, and recruitment), and independent contractor and third-party carrier costs (which are recorded on the "Purchased transportation" line of our consolidated statements of income). Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency, and other factors. Our main fixed costs are the acquisition and depreciation of long-term assets, such as revenue equipment and service centers, and the compensation of non-driver personnel. Effectively controlling our expenses is an important element of assuring our profitability. The primary measure we use to evaluate our profitability is operating ratio, excluding the impact of fuel surcharge revenue. (This is represented by operating expenses, net of fuel surcharge, as a percentage of revenue, before fuel surcharge).

Since our inception, an important element of our operating model has been an extreme focus on our cost per mile or cost per transaction. We intend to continue this focus as we build and grow our business.


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Recent Results of Operations and Quarter-End Financial Condition

Our results of operations for the quarter ended September 30, 2013, in comparison to the same period in 2012 were:

? Revenue, before fuel surcharge, increased 1.7%, to $195.9 million from $192.6 million;

? Net income attributable to Knight decreased 9.2%, to $15.1 million from $16.6 million; and

? Net earnings attributable to Knight per diluted share decreased to $0.19 per share from $0.21 per share.

We believe we continued to expand market share with our wide range of truckload services in the face of a difficult operating and economic environment reflected in a sluggish freight market and competitive market for driving associates. Our industry continues to be faced with a shortage of available high quality driving associates and we expect this trend to continue. Accordingly, revenue grew modestly, while net income was down and per-tractor asset utilization, measured by miles per tractor, was also down slightly.

We continued to grow our consolidated revenue despite facing a difficult operating and economic environment and operating 3.6% fewer tractors than in the third quarter of 2012. We continue to see growth in our non-asset service offerings, which increased 29.3%, and we expect our non-asset revenue growth to continue. Our revenue per tractor improved by 1.0%, as a result of a 1.5% improvement in revenue per total mile and a 0.5% decrease in miles per tractor. Our improvement in revenue per total mile was not enough to keep pace with increased costs associated with recruiting and retaining qualified driver associates, increased maintenance costs, rising equipment prices, and lower miles per tractor. Accordingly, our consolidated operating ratio (operating expenses, net of fuel surcharge, expressed as a percentage of revenue, before fuel surcharge), which is a non-GAAP measurement, was 87.6% for the quarter ended September 30, 2013, compared to 85.6% for the same period a year ago.

Our asset-based businesses continued to operate at a high level of profitability and efficiency, while our non-asset based businesses produced strong revenue growth. Our multiple service offerings continue to complement one another and enable us to provide solutions to the dynamic supply chain needs of our customers.

In the third quarter of 2013, despite sluggish freight demand and a more competitive driver market, our average revenue per tractor (excluding fuel surcharges) increased to $40,199 from $39,811. Our non-paid empty mileage percentage decreased slightly to 10.6% from 10.7% in the same quarter of 2012. We realized improvement in revenue per loaded mile, which increased 1.4% and our length of haul decreased slightly by 0.8%.

We utilized an average of 4,007 tractors for the third quarter of 2013, compared to an average of 4,158 tractors a year ago, as we continue to focus on improving our asset productivity. This total includes 471 tractors operated by independent contractors at September 30, 2013, which decreased from 503 tractors at September 30, 2012. Our tractor fleet remains one of the most modern fleets in the industry, with an average age of 2.0 years.

Our capital expenditures, net of equipment sales, were $57.2 million for the nine months ended September 30, 2013, compared to $85.9 million for the same period a year ago. At September 30, 2013, our cash and cash equivalents totaled $5.3 million and our shareholders' equity was $531.0 million, compared to $5.7 million and $490.2 million, respectively, at December 31, 2012.


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Results of Operations

The following table sets forth the percentage relationships of our expense items to total revenue, including fuel surcharge (Column A), and revenue, before fuel surcharge (Column B), for the three-month and nine-month periods ended September 30, 2013 and 2012, respectively. Fuel expense as a percentage of revenue, before fuel surcharge, is calculated using fuel expense, net of fuel surcharge. We believe that eliminating the impact of this sometimes volatile source of revenue affords a more consistent basis for comparing our results of operations from period to period.

We also discuss the changes in our expenses as a percentage of revenue, before fuel surcharge, rather than absolute dollar changes. We do this because we believe the high variable cost nature of our business makes a comparison of changes in expenses as a percentage of revenue, before fuel surcharge, more meaningful than absolute dollar changes.

                                                                     (B)                                                                (B)
                                   (A)                    (Fuel surcharge excluded                     (A)                   (Fuel surcharge excluded
                             (Fuel surcharge             from revenue and netted to              (Fuel surcharge              from revenue and netted
                          included in revenue)                  fuel expense)                 included in revenue)               to fuel expense)
                           Three Months Ended                Three Months Ended                 Nine Months Ended                Nine Months Ended
                              September 30,                     September 30,                     September 30,                    September 30,
                           2013            2012           2013                2012             2013            2012           2013                 2012

Total revenue                 100.0 %       100.0 %           100.0 %             100.0 %         100.0 %       100.0 %          100.0 %            100.0 %
Operating expenses:
Salaries, wages and
benefits                       25.1          24.5              30.7                30.2            24.3          25.7             29.8               32.0
Fuel                           22.7          25.0               5.6                 7.3            22.6          25.0              4.9                6.6
Operations and
maintenance                     7.1           6.7               8.7                 8.4             6.8           6.5              8.4                8.1
Insurance and claims            3.0           3.3               3.7                 4.0             3.0           3.4              3.7                4.3
Operating taxes and
licenses                        1.6           1.6               1.9                 2.0             1.6           1.7              2.0                2.1
Communications                  0.5           0.5               0.6                 0.7             0.5           0.6              0.6                0.7
Depreciation and
amortization                    9.2           9.2              11.2                11.3             9.0           9.1             11.0               11.3
Purchased
transportation                 19.1          16.4              23.3                20.3            19.2          15.4             23.6               19.2
Miscellaneous
operating expenses              1.6           1.1               1.9                 1.4             1.6           1.1              2.0                1.4
Total operating
expenses                       89.9          88.3              87.6                85.6            88.6          88.5             86.0               85.7
Income from
operations                     10.1          11.7              12.4                14.4            11.4          11.5             14.0               14.3
Interest income                 0.0           0.0               0.0                 0.1             0.0           0.0              0.0                0.1
Interest expense                0.0           0.0               0.0                (0.1 )           0.0          (0.1 )            0.0               (0.1 )
Other income
(expense)                       0.4           0.0               0.5                 0.0             0.1           0.1              0.2                0.1
Income before income
taxes                          10.5          11.7              12.9                14.4            11.5          11.5             14.2               14.4
Income taxes                    4.2           4.7               5.2                 5.8             4.6           4.8              5.7                6.0
Net Income                      6.3           7.0               7.7                 8.6             6.9           6.7              8.5                8.4
Net income
attributable to
noncontrolling
interest                        0.0           0.0               0.0                 0.0            (0.1 )         0.0             (0.1 )              0.1
Net Income
attributable to
Knight Transportation           6.3 %         7.0 %             7.7 %               8.6 %           6.8 %         6.7 %            8.4 %              8.3 %

(There are minor rounding differences in the above table)

A discussion of our results of operations for the nine months and three months ended September 30, 2013 and September 30, 2012, is set forth below.

Comparison of Nine Months and Three Months Ended September 30, 2013 to Nine Months and Three Months Ended September 30, 2012.

Total revenue for the nine months ended September 30, 2013, increased 3.7% to $719.6 million from $693.7 million for the same period in 2012. Total revenue included $134.0 million of fuel surcharge revenue in the 2013 period compared to $136.7 million in the 2012 period. Total revenue for the quarter ended September 30, 2013, increased 0.6% to $239.3 million from $237.9 million for the same period in 2012. Total revenue for the quarter included $43.5 million of fuel surcharge revenue in the 2013 period compared to $45.4 million in the 2012 period.


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Revenue, before fuel surcharge, increased 5.1% to $585.6 million for the nine months ended September 30, 2013, from $557.0 million for the same period of 2012. Revenue, before fuel surcharge, increased 1.7% to $195.8 million for the quarter ended September 30, 2013, from $192.6 million for the same period in 2012.

In the third quarter of 2013, we experienced 29.3% revenue growth in our non-asset based service operations, compared to the same period in 2012, which now make up approximately 17.6% of our revenue, before fuel surcharge. Revenue in our asset-based operations decreased 2.7% during this quarter, reflecting a sluggish freight environment and more competitive driver market. We increased our average revenue per total mile 1.5%, operated 3.6% less average tractors, and improved our non-paid empty mile percentage, which decreased by 0.9% in the 2013 quarter versus the 2012 quarter.

Salaries, wages and benefits expense as a percentage of revenue, before fuel surcharge, decreased to 29.8% for the nine months ended September 30, 2013, compared to 32.0% for the same period in 2012, and increased to 30.7% from 30.2% for the three months ended September 30, 2013, compared to the same period in 2012. The decrease in the nine-month period as a percentage of revenue is due to the $4.0 million pre-tax, non-cash stock compensation charge recorded in the first quarter of 2012 related to the acceleration of certain stock options issued prior to 2009. Excluding this charge, salaries, wages and benefits expense for the nine-month period of 2012 was 31.3%, expressed as a percentage of revenue, before fuel surcharge. Also, the decrease noted above in the nine-month period resulted due to the significant increase in revenue generated from our non-asset based operations and independent contractors, the expenses of which are reflected in purchased transportation. The increase noted above for the three-month period is a result of increased driver payroll expenses, as well as clerical and administrative costs increasing slightly more than revenue increases. Costs associated with healthcare benefits provided to our employees and accruals for workers' compensation benefits are a component of our salaries, wages and benefits in our consolidated statements of income. We believe that the driver market will continue to remain competitive for a variety of reasons and recruiting and retaining a sufficient number of qualified driving associates continues to be a major concern. Furthermore, recently implemented changes to the hours-of-service regulations may add additional strain on the market for driving associates as the regulations reduce the amount of hours a driver can work.

Fuel expense, net of fuel surcharge, as a percentage of revenue before fuel surcharge, decreased to 4.9% for the nine months ended September 30, 2013, from 6.6% for the same period in 2012 and decreased to 5.6% for the three months ended September 30, 2013, from 7.3% for the same period in 2012. In the nine-month and three-month periods ended September 30, 2013, compared to the same periods in 2012, the decrease as a percentage of revenue before fuel surcharge is primarily due to a combination of the revenue growth in our non-asset-based businesses, where no fuel expense is incurred, lower fuel costs per gallon, and improved effectiveness of our fuel efficiency initiatives. We have made improvements to reduce idle time, improve fuel purchasing costs, enhance equipment operations through training, and significantly improve aerodynamics and engine efficiency. We continue to invest in more fuel-efficient tractors. The National Average Diesel Fuel price decreased 0.3% and 1.0% in the nine months, and three months ended September 30, 2013, respectively, when compared to the same periods a year ago. Our fuel surcharge program helps to offset increases in fuel prices when they occur, but applies only to loaded miles and typically does not offset empty miles, idle time, and out of route miles driven. Typical fuel surcharge programs involve a computation based on the change in national or regional fuel prices. These programs may update as often as weekly, but typically require a specified minimum change in fuel cost to prompt a change in fuel surcharge revenue. Therefore, many of these programs have a time lag between when fuel costs change and when the change is reflected in fuel surcharge revenue. Due to this time lag, during periods of sharply rising fuel costs, our fuel expense, net of fuel surcharge, negatively impacts our operating income, and positively impacts our operating income during periods of falling fuel costs.

Operations and maintenance expense as a percentage of revenue, before fuel surcharge, increased to 8.4% and 8.7% for the nine months and three months ended September 30, 2013, respectively, compared to 8.1% and 8.4% for the same periods a year ago. Operations and maintenance consists of direct operating expenses


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(including driver recruiting), maintenance, and tire expenses. Sourcing and retaining high quality driving associates is critical to success in improving the productivity of our assets. We have made additional investments in our driver development and retention programs. The increase in both periods, year . . .

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